I really want to love Sodastream International Ltd. (NASDAQ:SODA) because it makes a nifty product. Unfortunately, that fact just isn’t enough to make SODA stock a good long-term investment.
As I’ve long argued, SODA stock is not a sustainable business for investors to put their money into. Why pay for a machine, flavoring and CO2 canisters and refills when you can buy an infinite variety of soda at your local store for next to nothing?
At least here in the U.S., I have always believed that the market was limited. I compared Sodastream products (and its competitors’) to an ice cream maker. It’s cool and fun, but you use it a couple of times and then it probably just sits on a shelf.
Naysayers assaulted me on a regular basis, saying I didn’t get it, that the whole point of Sodastream was to avoid lugging home a 12-pack of cans or 2-liter bottles. Lugging? Are you kidding? Shoppers are already lugging home entire bags of groceries.
Sodastream is also fighting entrenched products from The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). It also has to deal with competition from in-store products at Starbucks Corporation (NASDAQ:SBUX) and from Keurig Green Mountain Inc (NASDAQ:GMCR).
But no matter what I said, the SODA stock champions wouldn’t give in. Nor would they give in when Sodastream announced it was going to focus on the sparkling water market instead. The company talked about this strategy a few months ago and then last week announced it was launching Sodastream Naturals: flavored sparkling water.
Sodastream is trying to catch the secular move away from sugary sodas and into healthier water. It is doing so in a way that makes it clear that soda is no longer going to be its flagship product, by changing the tag line from “your home soda factory” to “water made exciting.”
The Numbers Aren’t Good for SodaStock
The machines are still being used, as the most recent quarter showed a 17% increase in carbonator refills, but soda maker starter kits were down 34% year-over-year, and flavors were down 38%. Those numbers are pretty much consistent with the fact that overall soda sales have fallen for 10 consecutive years across the entire market.
U.S. revenues fell 49%, further proving my point. Total revenue fell from $168 million to $126 million.
But here’s the thing – this pivot into water is not going to work. The quarterly results showed that even sparkling water makers fell 34%.
This does not mean the company is going under, although over the long term I have concerns. It did earn $1.31 per share in FY14, giving it a PE of 15. Still, that’s a hefty price to pay for declining revenues. The balance sheet is fine with $47 million in cash on hand and $44 million in low-cost debt.
So what’s the play?
SODA stock is not an investment. At best, it is a trading stock. If you feel like trading, then watch how SODA stock moves and try and catch a wave. It’s closer to a new low now than before, so there may be a few points of upside as foolish longs buy on the dip.
Over the very long term, Sodastream is a short. I just don’t see how the business can sustain itself with declining revenues. Eventually, SODA will create negative operational cash flow, the company will eventually burn through that cash and go under.
Look out below.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
